The world of initial coin offering (ICO) investing is chock full of peril and risk, as well as opportunity. Purchasing a tokenized asset has become a trip to Vegas-like event as investors attempt to discern which ICO will rise and which offering will quickly plummet. Scams and questionable investment opportunities abound, and certain practices have cropped up to help differentiate the more reputable offerings from the ones that, well, are not so reputable. One of these practices is the sometimes dubious practice of enlisting ICO advisors.
First of all I must admit, we use ICO advisors as one possible metric to measure whether an offering is a scam or perhaps a viable project. I admit it. Having a name of someone we know directly, or at least know a lot about, provides certain level of confidence that the digital asset has a chance of surviving beyond a public crowdsale.
But then there is the other side of the digital coin where some individuals have used the emergence of ICO advisors to create a cottage industry of sorts. This has become less about truly advising an issuer and more about selling one’s name.
Some ICOs have clearly fallen prey to the trap that simply posting the name of an industry player is a sufficient veneer to guarantee ICO success. And some of these ICOs are willing to pay dearly for posting a name, image, and bio, on their home page to generate a patina of credibility. And all too frequently, that is where the “advisor” qualification ends.
One egregious example of using someone’s name without permission is from 2017 when NextBlock Global blatantly distributed an investment deck listing big names as advisors without getting their approval. A Forbes article claimed people were investing solely because of the names involved. While the NextBlock saga may be an extreme story of a craven need for validation, the lesson learned remains.
Miko Matsumura, founder of Evercoin Exchange, often gets listed as an ICO advisor to token offerings, only to find out from folks who message him inquiring about his involvement on certain projects. To combat this fraud, he posts a list of ICOs he advises on his website.
“The three things every ICO investor should do is 1) try to understand the reputation of advisors associated with a project and 2) to find out how those advisors are being compensated,” shared Matsumura. “3) lastly it’s important to find out if they are truly advising the project as advertised. You’d be surprised how many advisers are listed on web sites without their explicit consent.”
However, there are rumblings in the crypto industry about multiple ICO advisors that companies (and investors) should steer clear of. Today, for some investors in the space, the mere affiliation with a questionable advisor has become an indicator that the ICO team is unable to complete basic due diligence. Increasingly, some advisors have become a huge red flag and negative selection event. For others, there is still a costly learning curve.
Numerous ICO advisors are accepting tokens as part of their remuneration. But some ICO advisors are accepting cold hard cash: up front or payable in monthly installments. There may be nothing wrong with a pay for service, but does the cost justify the value created? You be the judge.
Recently, someone shared a private thread of crypto industry types that outlined what at least one advisor was charging for their services.
The fee was described as follows:
“Advisory Board Member shall earn 30 ether monthly payable for two months at signature. And Advisor earns whichever is higher of A) 0.8% of all pre ICO and ICO Tokens planned to be sold or b) $100,000 in Company Tokens. This compensation is earned and vested at signature of this agreement.”
This thread also described the emergence of a different type of crypto scam – one related to ostensible family office affiliation.
“The new scam seems to be people who claim they run a family office, but in fact never make investments and target/prey on startups to try and charge them crazy $ to ‘present at conferences with family offices.’ #thanksnothanks”
The advisory fee described above is a lot of money, both crypto, and fiat, for a face, but then there are a lot of desperate ICO issuers out there worried their offering will not be a success. And there is a lot of pressure to cash in on the heightened crypto craze.
CI reached out to Amy Wan, CEO and founder of Sagewise, a safety net for smart contracts which provides a toolkit for contract errors and disputes. Wan is also a noted securities attorney and CI Senior contributor.
We asked Wan if the marketplace for ICO advisors – has it gotten out of control;
“It was already out of control in 2017,” said Wan. “ICOs were targeting and stacking influential advisors in order to attract investment, and many advisors were charging excessive amounts for the right to put their face on a website – although in many cases, they were often just figureheads for the public token sale and didn’t actually advise. Some advisors charged tokens to pump the ICO, but did not disclose this publicly when promoting the ICO. And I’ve heard of many projects that put an individual picture as an advisor on their website without that individual ever having agreed to be an advisor.”
So do these advisors add value to a blockchain based offering? That depends. Wan believes, as do others, that advisors should be contributing to a project the same way a startup advisor contributes; advice, time, strategic connections and knowledge.
But too frequently, the advisory role stops at a photo and a bio.
Nowadays, the rates are lower, and purported crypto-advisors abound.
“… I’ve also heard of advisors who will charge $20-50K monthly alongside tokens,” said Wan. “And companies are not helping – I often get spammed by ICO projects asking me to be their advisor, without actually ever telling me about the project. They’re not looking for advice as much as they’re looking for someone influential to put on their website.”
And what about the Family office shell game? Aren’t family offices in the business of investing their money – not charging potential investment opportunities?
“I’ve come across more than one ‘family office’ that asks startups to sponsor significant sums of money to ‘pitch’ other family offices that they know of,” Wan explained. “They’ll spam you on LinkedIn introducing themselves as family office investors, who then pull a bait and switch and ask you to sponsor their event or advise your project. They have no intention of investing (and probably don’t have funds to invest at all). ICO projects should beware of these scams.”
The frenetic nature of the ICO market has not helped the situation. The wild west days of anything goes will soon be over as professional operations take over and the quick money types flee to their next mark in their ongoing con. There is one other potential problem with ICO advisors: if they are getting compensated based on the offering success they may be transgressing certain securities laws.
Anthony Zeoli, a Fintech attorney and CI Senior Contributor, had this to say;
“Anyone who is getting paid to endorse or promote a cryptocurrency product should be wary of current laws surrounding such activities; particularly if they are getting compensated, in whole or in part, in the cryptocurrency they are pushing. If not, my guess is you will see a lot of celebrities and other promoters getting smacked down by the SEC.”
Word to the wise: Do your own due diligence, check people out, and make certain any remuneration makes sense. You need to ask a lot of questions of potential advisors and other people who have been down this path. You may be surprised by the answers you receive.